New York District Court Dismisses ‘Scam Token’ State Law Claims Against Creators of Decentralized Cryptocurrency Exchange

On March 2, 2026, Judge Katherine Polk Failla of the U.S. District Court for the Southern District of New York dismissed a putative class-action complaint against the creator of a decentralized cryptocurrency exchange and its CEO, which alleged that they were responsible for losses suffered by the plaintiffs in connection with their investments in a number of “scam tokens” issued by unidentified third parties and traded on the exchange. 

Earlier in the long-running case, Judge Failla had dismissed federal securities law claims against the defendants. The U.S. Court of Appeals for the Second Circuit later affirmed dismissal of those claims but directed the district court to consider the remaining state law claims under the Class Action Fairness Act (CAFA). The plaintiffs subsequently amended their complaint to bring claims under New York law for aiding and abetting fraud, aiding and abetting negligent misrepresentation, and unjust enrichment. The plaintiffs also brought claims under New York, North Carolina, and Idaho consumer protections statutes.

After consideration of the plaintiffs’ remaining claims, Judge Failla dismissed the entire complaint with prejudice, explaining that “[t]hough the claims have changed, the result is the same: Plaintiffs cannot hold Defendants liable for the misconduct of the unidentified third-party issuers.” 

• Aiding and abetting fraud (New York law). Judge Failla held that the plaintiffs’ claims failed to adequately allege that the defendants had “actual knowledge” of the fraudulent actions of the scam tokens’ issuers or that the defendants provided “substantial assistance” in the commission of the fraud. Judge Failla found, among other things, that general warnings on social media and a report describing scam tokens on the exchange that made no specific reference to the scam tokens at issue were insufficient to demonstrate the defendants’ actual knowledge of the fraud. Judge Failla further noted that “merely creating an environment where fraud could exist is not the same as affirmatively assisting in its perpetration,” and thus the defendants’ creation of the exchange did not constitute substantial assistance of fraud where the bad actors behind those schemes represented only a subset of the activity on the exchange. 

• Aiding and abetting negligent misrepresentation (New York law). Judge Failla dismissed this claim for the same reasons as the aiding and abetting fraud claim—the plaintiffs failed to demonstrate that the defendants had either actual knowledge of any misrepresentation or that they provided substantial assistance to perpetrate the misrepresentation. 

• Unjust enrichment (New York law). The plaintiffs’ unjust enrichment claim failed because they did not adequately allege that the defendants derived any benefit from the bad acts of the scam tokens’ issuers. While the plaintiffs alleged that the exchange was designed to allow the defendants to derive fees from transactions, there was no allegation that any fees were collected during the relevant class period. Judge Failla also found that the plaintiffs’ other attempts to allege a benefit were too conclusory to avoid dismissal. 

• Violations of state consumer protection statutes (New York, North Carolina, and Idaho law). Judge Failla found that the consumer protection statute claims failed to allege three required elements—deception, causation, and unconscionability. First, the plaintiffs failed to adequately allege any affirmative misstatements or omissions of information in the defendants’ possession because they cited either public information or statements from the defendants that in fact warned the plaintiffs of the risks of scams. Second, the plaintiffs’ allegations only causally tied the scam tokens’ issuers’ acts to their losses, not any acts by the defendants. Third, Judge Failla explained that there was nothing unconscionable “about creating a platform to access a marketplace where millions of users can lawfully swap tokens, even if fraud might occur on that marketplace,” and thus the claims failed to meet this additional required element under both North Carolina’s and Idaho’s consumer protection statutes.

Judge Failla’s decision marks a significant victory in the evolving legal landscape for digital asset technologies for the creators of decentralized blockchain protocols, who are likely to rely on the decision to limit the potential reach of alternative state law claims against them brought by cryptocurrency scam victims. The decision also underscores the difficulties faced by the victims of cryptocurrency scams seeking to recoup their losses. As Judge Failla recognized in her decision, the plaintiffs pursued claims against the defendants because the identities of the scam token issuers themselves were unknown.